I learned a new term. When a property is deemed ‘underwater,’ it means that the current value is less than what the buyer still owes on it. When a property goes underwater, it makes some business-sense for the owner to simply abandon the property by defaulting, and allowing the lender to take possession of it.
While this might seem like throwing the baby out with the bath water, big investment firms seem to have no qualms about the tactic when it gives them an advantage. The Huffington Post reports,
a group led by Tishman Speyer Properties gave up the 56-building, 11,232-unit Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan, turning the properties over to its creditors after defaulting on some $4.4 billion in debt. The group decided to “transfer control and operation of the property…to the lenders,” it told the Wall Street Journal. The $5.4 billion acquisition in 2006 was the single biggest residential property purchase in U.S. history.
It’s now worth an estimated $1.8 billion, putting the properties’ owners “underwater.”
In this context, “transfer control and operation of the property…to the lenders” simply means they decided to stop paying and default on their debt. The firm owed nearly 2½ times what the properties are worth so I can see the logic. So can Brent T. White, a law professor at the University of Arizona. He says,
there is in fact a huge financial upside to strategic default for seriously underwater homeowners — an upside that is routinely ignored by the media, credit counseling agencies, and other political and economic institutions in ‘informing’ homeowners about the consequences of default.
But it’s worse than that. It’s not that home owners are not told of the up-side to abandoning underwater properties, they’re actively dissuaded. Hank Paulson, former U.S. Treasury Secretary said,
And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligations.
And John Courson, head of the Mortgage Bankers Association,
What about the message they will send to their family and their kids and their friends?
Of course the business community doesn’t care one whit for such arguments, though they’re quick to use them on the average Joe. Investors will walk away without a second thought, but if homeowners do the same thing, it’s suddenly a moral transgression. Perhaps this is because those same investors with holdings in financial institutions will suffer if the general public starts to use the investors’ tactics?
No wonder the economy is such a mess.